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Arkansas: Guidance Today, Gone Tomorrow

A recent Arkansas court opinion points out what might be a troubling trend in state taxation: the inability of taxpayers to rely on administrative guidance because the state can retract or supersede it on a moment’s notice.

The underlying Arkansas case is not particularly exciting. It addresses whether the cost of retrieving copies of a patient’s medical records is subject to sales tax. In the end, the state supreme court ruled in favor of the state, concluding that the cost is subject to tax.

But the ruling isn’t the most interesting take-away. During the course of litigation, the taxpayer cited an attorney general opinion in support of her position. The AG opinion concluded that a healthcare facility cannot charge sales tax to a patient or a patient’s attorney if either requests copies of the patient’s medical records under Ark. Code Ann. Section 16-46-106.

But when the state found out that the taxpayer was relying on the AG’s opinion, the attorney general quickly supplemented his opinion, saying:

It has since come to my attention that the Arkansas Department of Finance and Administration (“DF&A”) has taken a different approach to this issue in nonpublic letter opinions, deeming the provisions of such records subject to sales taxation. Although I still subscribe to the reasoning set forth in my previous opinion, I must acknowledge that DF&A in administering the tax laws is not subject to my opinion on this matter. This office has often noted that the power to determine issues relating to imposition of taxes is vested in the Revenue Division of the Department of Finance and Administration. . . . I therefore suggest that any individual or entity with questions relating to this issue submit its concerns to the [Arkansas Department of Finance and Administration].

The Arkansas court didn’t take issue with the retraction of the attorney general’s opinion. The court said the DF&A has been directed to promulgate rules and regulations for the proper enforcement of the tax code. In other words, attorney general opinions can be relied on only to the extent they agree with the DF&A’s statutory interpretations.

But the Arkansas attorney general isn’t the only one retracting opinions. At a recent tax conference, a practitioner from Texas said that the state is willing to supersede letter rulings when it doesn’t agree with the result that would occur if a taxpayer is permitted to use a letter ruling as support for its position. He recalled a recent situation in which a letter ruling was brought up as support for the taxpayer’s position. The representative for the state dismissed the ruling, saying it had been superseded. The attorney for the taxpayer asked when that had happened, and the state’s representative said, “Yesterday.”

Letter rulings, though typically binding only on the state with respect to taxpayer that requested it, represent the state’s position on a particular issue and therefore are a useful tool for helping taxpayers understand the risks associated with a position or transaction. Retracting a letter ruling should occur only when the law has changed, not merely because it no longer suits the state’s needs.

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